Global Sourcing Sprawl: Monitoring and Managing Global Sourcing & Services Risks
Author: Atul Vashistha, Chairman & Alan Hanson, SVP, Neo Group Inc.
The globalization of services has become a mainstay of corporations. This dynamic has a huge impact on the competitiveness of global corporations. Yet, global sourcing is not what it was even a few years ago. Its complexity has risen manifold. It embraces multiple locations and multiple processes as companies seek, presumably, to optimize the gains from outsourcing and offshoring. But it also has raised risks and brought on newer, and varied, risks, many of which are not fully assessed by management.
Over the past year, in particular, many of these risks have been brought to light by global events. In April 2011, it was a geo-political situation in Egypt that led to an unprecedented nine-day Internet shutdown. In July 2012, we saw a massive blackout affecting 670 million people in India, the single largest market for services outsourcing. In between, there were economic meltdowns in Southern Europe, Japan’s Tsunami and another deadly season of hurricanes, floods and tornadoes across the US (reminders that even developed and onshore locations carry risk).
Far from seeing the glass as half empty, there is no reason for companies to turn the clock back on globalization or give up on further gains. The need of the hour, instead, is a proactive, and effective, opportunity and risk-monitoring mechanism and strategy to manage the new levels of risk and complexity.
To imagine this complexity, think of a corporation’s global operations as a giant jigsaw puzzle whose pieces are being ordered from different parts of the world, to be finally assembled, perhaps, at its headquarters. Each piece of the puzzle is important, and has to be ordered to precise specifications; and all the pieces then need to come back in good time, and to exact standards, for managers to put the puzzle together. In this situation, what would happen if one piece is lost because of a typhoon in Manila? Or another is delayed by a flood in Mumbai? Or another is caught up by expiring tax incentives in Brazil? Or suddenly one piece costs far more to produce than budgeted as a result of wage inflation in Bogota or a policy U-turn in Russia? And, worse, what happens when multiple things go wrong at the same time? Would one be able to address these better if they had a fair warning?
The unity and diversity of risks
Even given the complexity of modern corporations, and their sourcing processes, it must seem puzzling to comprehend why globalization risks have grown dramatically. The simple answer is: geography and scale. It is the unity that binds globalization risks, while the diversity of the risks comes from the unique vulnerabilities of each location and the scale at which it is being performed. When companies first started outsourcing, most of the work was discrete and project based. Now, a significant majority of the work is management of ongoing projects and processes.
A decade ago, there were far fewer countries to which corporations farmed out any work. Giant nations such as China and India were the choice, themselves leaning heavily on outsourcing to create jobs and to drive domestic growth.
Today, Latin America, for example, is a large emerging outsourcing hub whose proximity to developed North American markets has proved a recent boon. Similarly, Eastern European countries, especially after the financial re-alignment following the 2008 financial crisis, have the twin advantage of lower costs and affinity to developed European markets.
These ‘me-too’ regions, coupled with global corporations’ insatiable appetite to support their needs in lower cost locations have succeeded beyond the most optimistic estimates. As a consequence, sourcing has a global footprint that is far and wide, with over 50 countries providing some kind of services. This geographic sprawl along with scale is responsible for the higher risks.
Geographic risks, of course, don’t mean only natural disasters. They mean much more – geopolitics, regional politics, regional financial policy, local (city- or region-specific) culture and politics and several others. It might be useful to categorize the risks, along with the most relevant examples, as follows:
Seasonal (and predictable) natural disasters
Monsoon floods in Mumbai, typhoon season in Manila
Unpredictable but several countries could be vulnerable, with India and Pakistan near the top
Wage inflation in India, Brazil and Czech Republic
City- or region-specific risks
Hyderabad because of agitation for separate statehood for Telengana
China for its currency risks; Greece for its bankrupt economy; Europe overall because of the euro’s vulnerability.
Almost all emerging markets and some developed ones, too, on account of opposition to immigration and outsourcing
India’s fraud-hit Satyam Computers is the most egregious example. But almost every vendor has a level of risk that needs to be assessed
Likely, none of these specific events could have been predicted with any accuracy. However, many of these could have been anticipated. Consider an example.
Egypt has been a dictatorship for decades, and the Egyptian Movement for Change, the fountainhead of protest against the Hosni Mubarak regime, was started in 2003. Besides, Egypt’s geographical location –situated in a region of harsh, Islamic dictatorships with Israel as neighbor – brought more than average risks. It is conceivable, therefore, that companies that sourcing to such region should have been not only aware of the risks but also pro-actively monitored those closely to pick up early warning signals, and even set up appropriate redundancies.
The fact is: the worst of risks can be fully assessed well ahead of time, avoiding service disruptions, financial losses and potentially brand dilution.
To start with, we propose that risks be broadly, categorized as
· Country Risks
· City Risks
· Supplier Risks
And at each level there are certain risk categories. For any particular city, by example, it is possible to create a risk model, using parameters that uniquely contribute to the strengths and weaknesses of the cities. Some criteria are:
§ - City budget deficit
§ - Rental rates
§ - Space availability
§ - Local taxes
§ - Lodging costs
§ - Industry size
§ - Attrition
§ - Pool of graduates
§ - Existing and planned SEZs
§ - Educational institutes
§ - Attrition rates
§ - Wage inflation
In our own model for example, data is continuously collected across the various parameters at the Country, City and Supplier levels and analyzed using an analytical engine to help inform critical decision-making.
We don’t advocate our model exclusively, but over the past two years clients have used it in the real world with encouraging results. In one case, this model helped pick up early warning signals on a policy decision in India - termination of the Software Technology Parks of India (STPI) scheme, which offered tax breaks. Based on the recommendations one of our clients, a leading semiconductor company proactively renegotiated, a deal with a partner to locate in a SEZ, ahead of the policy announcement. Call it “operational arbitrage” if you like, but it helped the client realize annual savings of approximately eleven percent
In another case, the model picked up signs of likely escalating attrition levels in the subsequent two quarters in Shanghai, which helped clients begin “proactive” employee retention strategies with its suppliers, mitigating potential quality of service issues common to higher attrition. .
For global minded companies, the point is that the world has changed, becoming abundantly more complex, and the tools we use to manage it should therefore change too.
Some people are startled to learn that the first electric vehicles, EV’s as they were known, graced the road more than 100 years ago (they retailed between $1000- $2000 - without any government tax incentives, thank you.) But these EVs would be incompatible with the driving conditions presented by the modern highway, and, frankly, blown-away by the basic model Honda Prius too. They had a top speed of around 15 miles per hour, and could only go about 18 miles on a charge. Talk about range-anxiety.
Firms leveraging global services can help avoid a different kind of anxiety by adapting a risk management approach and system to ensure the stability of operations and avoid significant disruptions.
Managing the global services sprawl all but requires it.
Atul Vashistha is the Chairman and Alan Hanson is SVP, of Neo Group Inc., a leading Global Advisory and Supply Analytics firm, which provides Global Supply Risk Monitoring as a service for dynamically monitoring, managing and predicting country, city and supplier risks.
Atul is a recognized leader in the global services industry with numerous industry recognitions, such as ‘Top 25 Most Influential Consultants’, ‘Nearshore Power 50’, ‘HRO Superstar’, ‘FAO Superstar and Global Sourcing Leader’. You can get in touch with him on – email@example.com. Please visit www.GlobalSupplyRiskMonitor.com for more details on GSRMSM.